The software industry is undergoing a massive transformation due to virtualization, SaaS, and open source. I will be giving my perspective on these changes based on my 15 years in the tech industry -- 10+ in open source opportunities including 6 years at Red Hat.

Thursday, July 24, 2008

The CIO is the Last to Know

A recent Goldman Sachs survey of CIOs indicates that these executives do not plan to spend much money on cloud computing in the coming year. Indeed, most of their stated plans involve reducing the amount of consulting services and hardware that they are buying. I'm certain the predictions are accurate, and this scenario will lead to even more rapid growth in cloud computing. And the CIO will be the last to know.

How does this work? If Goldman has correctly measured the intentions of the CIOs, then they will not be spending money on cloud computing. Instead it will be the business units that they are supposed to serve that will be spending the money because the service level of the IT department will not meet their needs. Recall the reduction in consultants and service personnel? When a fixed income group at an investment banking house needs to stand up 50 servers to run a set of Monte Carlo simulations to test a hypothesis, the over-stressed IT department response is going to be “we'll get to that request after we fill the 25 that are in line ahead of it. It will probably be next quarter.”

The “swoosh” sound you just heard is the developer of the simulation code swiping his credit card to set up his Amazon Web Services account. Three days later, he has 100 systems standing up on Amazon's Elastic Compute Cloud pumping back the information he needs to help his traders make money. The credit card bill is only about $5000 per month – much cheaper than the IT chargeback for similar capability. The head of fixed income hears about the profits due to the extra simulation capacity, and the developer gets a promotion and is encouraged to spin up another 100 to 200 machines to get even more aggressive with the strategy. Relative to the millions in profit, the cost is peanuts and the IT department just can't respond to these type requests anyway. The CIO is the last to know.

It always happens this way with new technology. As the leader of North America sales for Red Hat in 2002, I remember calling on the CIO of a company in the financial services industry that processed millions of transactions daily in support of the equities market. I sat in his office while he explained to me that his operation was mission critical – the markets depend on this operation. He would never consider using Linux and open source. “Why don't we take a tour of the datacenter,” he asked. I was game, so I replied “Sure.”

As we walked the floor, I noticed several machine consoles indicating they were attached to Red Hat Linux 7.1 servers. Here is the conversation that ensued:

Steve the Admin: You know, Apache, BIND, SendMail, a few transaction servers and log crunchers mixed in here and there.

CIO: How many of these are we running in this datacenter?

Steve the Admin: About 25% of the machines, I would guess. About 800 servers in total.

Billy: Why don't we go back to your office and have another conversation about how much value you are getting out of Linux and open source and how Red Hat can help you.

The CIO is always the last to know about new technology. The head of engineering brought UNIX into the enterprise for CAD/CAM and analysis applications, and the CIO was the last to know. Department managers brought in PCs and Windows for personal productivity and desktop publishing, and the CIO was the last to know. System administrators brought in Linux for network services, and the CIO was the last to know. The sales force brought in salesforce.com and introduced the enterprise to SaaS, and the CIO was the last to know. Developers in the business units will use cloud computing, and the CIO will be the last to know.

The good news is that CIOs know where their bread is buttered, and eventually supporting the business units becomes the top priority. In this case, I would guess that all of that spending that Goldman noted as being earmarked for virtualization will pave the path for a hybrid approach to cloud computing. The enterprise IT function will begin to model the services that they provide after Amazon, with hypervisor virtualization as the basis of the compute capacity. Then, with a single, corporate architecture for cloud computing, applications will be able to scale seamlessly across the internal cloud infrastructure and also out into the external clouds when necessary for extra capacity. In this scenario, everyone gets what they want, and the CIO is a hero for reducing the fixed costs and operating budget associated with data center capacity. Being the last to know isn't necessarily a bad thing.

6 Comments:

The CIO may be the last to know, but the CEO will be the first to be prosecuted when confidential data is stolen because the cloud the Fixed Income group was using is compromised. Bringing Linux into your data center is a lot less risky than outsourcing your data center. Especially when that outsourced data center is a haven for spammers and other nefarious types.

Run_dfc,How many times do we need to hear this tired argument? We heard it when Ross Perot started EDS as a mainframe time sharing operation. We heard it when Exodus and Rackspace and others began managed datacenter operations. We heard it yet again when Marc Benioff started salesforce.com. "No one should trust their data to a third party! Danger, danger! Big trouble! Blah, blah, blah!" Last time I checked, all of these firms are doing fine and count customers like Merrill Lynch, Cisco, Wachovia, and the entire Fortune 500 among their customers. And I have not seen one CEO jailed as a result.

Of course there has to be physical and logical security to protect data and processes. It goes without saying. So let's not say it again. The new providers will have it. It will be business as usual. And we will all be better served because of it.

With SAP and Oracle both announcing price increases for maintaining bloated on-premise enterprise software, isn’t this CIO attitude the equivalent of reacting to a gas price increase by postponing your purchase of a Prius, and driving your Hummer for awhile longer?

Security is an issue, especially for a public company. I have embraced cloud computing and continue to try and find new applications to push out of my data center. But my vendors have to be SAS\70 compliant and have the reputation of being a secure partner. If I can demonstrate that due diligence was performed in selecting cloud vendors, it certainly limits our liability.

By the way, if the CIO is the last to know, that CIO needs to work on his relationship management. He is either disconnected from the techies or the business. Bridging these two camps is his JOB!

I hope that CIO is not always the last to know. I agree that innovative technologies often come from business units, and that CIO's often have the added pressures of reducing corporate IT spending. But, hopefully, some of us who lead IT shops have a technical clue about what's going on in the world. Hopefully some of us actually pilot new technologies and aren't afraid to embrace open source, SaaS, cloud computing, etc. I know it's hard to believe but some of us really do try to balance our fiduciary duties along with the need to explore and embrace new trends and technologies.

Rick,The difficult situation that CIOs face is that they are seldom rewarded for taking risks. It is OK for a business unit head to "go for it" with a new product and fail. With the failure of a technology project, however, unwinding the damage is very messy.

Fortunately, new technologies like SaaS and cloud computing, which involve much lower fixed costs and mitigate the expense of switching costs, will enable more and more CIOs will be in a position to "go for it" without risking the franchise. Let's hope so.

About Me

Billy is an entrepreneur and a technology visionary who is passionate about disruptive innovations that dramatically improve entire industries. Billy is the CEO of ServiceTrade, the company that is reinventing the business of maintenance with a cloud and mobile application for facility maintenance companies. Previously, Billy was founder and CEO of rPath, one of the first companies to recognize that application delivery would be forever altered by virtualization and cloud computing. He was also an early employee at Red Hat, first leading product marketing and then North America sales during the period when enterprises first adopted Linux and open source for mission critical infrastructure. Billy began his career with GE and IBM. Billy holds an Aerospace Engineering degree from Georgia Tech as well as MS degrees in Management and Engineering from MIT.